Interbank Competition with Costly Screening

Journal article

We analyze credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker's (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature ...

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Authors: Morrison, A; Freixas, X; Hurkens, S; Vulkan, N

• Publication date: 2007-01-01